Saturday, May 04, 2013
9:28 PM

This is a guest post by Ed Ring editor of Union Watch, a project of the California Public Policy Center.

California’s State/Local Governments Confront $1.0 Trillion in Debt

A study released earlier today by the California Public Policy Center entitled “Calculating California’s Total State and Local Government Debt”
has estimated that state and local government debt is somewhere between
$848 billion and $1.12 trillion. This is the first attempt we’ve ever
seen by anyone to provide an estimate.

Small wonder. If Californians understood that their local city
councils, school districts, redevelopment agencies, special districts,
county supervisors, and state legislators had managed to put them on the
hook for over $80,000 of debt per household, they might vote down the
next new taxation or bond measure that appears on the ballot. Imagine
how much debt this equates to per taxpaying household.

Quoting from the study’s summary, here are the categories of government debt confronting Californians:

When, along with the $27.8 billion “Wall of Debt,” long-term debt
incurred by California’s state, county, and city governments, along
with school districts, redevelopment agencies and special districts are
totaled, the outstanding balance is $383.0 billion. The officially
recognized unfunded liability for California’s public employee
retirement benefits – pensions and retirement health care – adds another
$265.1 billion. Applying a potentially more realistic 5.5% discount
rate to calculate the unfunded pension liability adds an additional
$200.3 billion. All of these outstanding debts combined total $848.4
billion. By extrapolating from available data that is either outdated or
incomplete, and using a 4.5% discount rate to calculate the unfunded
pension liability, the estimated total debt soars to over $1.1 trillion.

According to a Wall Street Journal editorial from April 29th, 2013 entitled “Debt and Growth,”
former White House economist Larry Summers is suggesting that “the U.S.
should borrow even more money today because interest rates are low.”
Summers is not alone. But hasn’t America heard this song already, and
quite recently? What happened to all those homeowners who borrowed money
because the payments were low, then suddenly realized they owed more
money than they could ever hope to pay back?

There is cruel hypocrisy at work here. Low interest rates mean people
saving for retirement cannot hope to amass a nest egg big enough to
earn a risk-free return sufficient to live on. Yet the government worker
pension funds engage in massive risk in a desperate attempt to earn
7.5% per year, so government workers can enjoy pensions that a private
sector worker would have to save millions to match. If they fail to get
that 7.5%, taxpayers make up the difference.
Hypocrisy abounds. Unions representing public educators train their
members to teach their students that capitalism is the problem, that
“corporate greed” is why their parents struggle to make ends meet. Yet
without corporate profits, the pension funds – whose 7.5% per year
annual earnings guarantee them an early retirement with an income that
dwarfs what private workers get from social security – would implode.

As shown in the CPPC study, for every 1.0% the projected rates of
return for the pension funds drop, the debt confronting Californians
increases by $100 billion. The “official” estimate for this shortfall,
acknowledged by the state controller, is $128 billion. If you drop that
projected rate to 5.5%, add another $200 billion to the unfunded
liability. Do you think that’s still too high? If those pension funds
only earn 4.5%, add another $126 billion to the unfunded liability for
pensions.
And why shouldn’t pension funds only earn 4.5% in today’s debt
saturated, aging society, where 30 year treasury bills are offering a
paltry 2.8%, and a 30 year fixed rate mortgage is down to 3.25%? With
all this nearly free money around – courtesy of our government who
spends far to much to borrow at any decent rate of interest – where on
earth will CalPERS and the other pension funds invest their money with
the expectation of getting 7.5% per year?

It’s important to emphasize that the CPPC study employed transparent
logic, documenting all their assumptions. Just using the official
numbers, California’s state and local governments still owe $648
billion, and of that amount, $265 billion or 41%, represents the
officially recognized unfunded liability for government retiree health
care and pensions. Another $8.0 billion on top of that is for pension
obligation bonds – and most of the data available is nearly two years
old. By now, how many more of those have been issued by our financially
crippled cities and counties? And how much more of the rest of this
borrowing – that other $373 billion in bonds for myriad projects
administered by countless government agencies – went to cover personnel
costs, or pay “prevailing wages.”

California State/Local Government Debt – The Low Estimate:
As noted in the CPPC study, there is a case to be made for “good
debt.” This is government investment in infrastructure such as roads,
bridges, water treatment plants, aqueducts, ports, or to fund research
into medicine, energy, agriculture, and other scientific endeavors.
Government borrowing for infrastructure and scientific research
provides a return to taxpayers in the form of new amenities – ideally
amenities that will lower the cost of living and improve the quality of
life.
But you don’t have to be a raging libertarian purist to criticize the
borrowing that has stuck California’s taxpayers on the hook for a cool
trillion dollars.

Because well more than half of the money owed has
nothing to do with infrastructure, or research, or anything else that
might pay dividends to society at large. Most of the money owed by
California’s state and local government agencies is to pay unionized
government workers rates of compensation that most private sector
workers can only dream about.

If you accept the CPPC study’s higher
estimate, $1.12 trillion, $663 trillion is explicitly for public
employee benefits, and countless additional billions in bond proceeds
undoubtedly went to pay personnel costs.

As noted in last week’s
editorial, “What If Every Worker Made What City of Irvine Workers Make?”
if every worker and retiree in California enjoyed the total
compensation packages enjoyed by a typical worker employed by the City
of Irvine, it would be necessary to double California’s gross
domestic product in order for enough money to exist to pay them. In
other words, it’s impossible. But if you can’t afford something, borrow.

California State/Local Government Debt – The High Estimate:The primary reason California’s state and local governments are
inundated with debt is because there are two classes of workers in
California – government workers and workers representing government
contractors and public utilities, and the rest of us.

These unionized
government workers can support an oppressive regulatory scheme, stifling
development of land and energy, because they can afford to pay the artificially elevated prices, and higher taxes, that result from these policies.

There is a way out. As explored in our editorials “Bi-Partisan Solutions for California,” and “The Prosperity Agenda,”
there is abundant land in California, and abundant energy resources.
California should have the most affordable housing and the cheapest
electricity in the U.S., instead of the most expensive. Public policies
designed to encourage land development and energy development would
decisively lower the cost to live in California, which would make public
employee compensation reform a palatable option, even to those affected
by it.

UnionWatch is edited by Ed Ring, who can be reached at editor@unionwatch.org

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